ATI takes $145 million hit in third quarter

A second straight quarterly loss has put pressure on Allegheny Technologies Inc. to cut costs amid declining demand for its steel products, complicating efforts to negotiate a union contract with more than 2,000 workers who have been locked out for more than two months.

The company lost $145 million, or $1.35 per share, in the quarter ended Sept. 30, compared with a loss of $700,000, or 1 cent a share, in the same period a year ago.

Overall sales declined 22 percent from the same quarter a year ago to $832.7 million.

Its shares fell $1.98, or 11.66 percent, to $15.

The company expects to improve sales with higher-margin aerospace products, but is scrambling to turn around its struggling flat-rolled steel business.

“We're not going to make any excuses,” said Rich Harshman, president and CEO at ATI. “Our job is to return ATI to profitability as quickly as possible.”

The third-quarter loss arrives as ATI is engaged in a contract standoff with the United Steelworkers. In August, ATI locked out 2,200 union employees at a dozen locations in six states and has been operating the facilities with salaried and temporary employees.

Harshman said Tuesday that he had no update to provide on the negotiations. A sticking point has been over health benefits.

The company is confronting an urgent need to slash expenses that could make a resolution to the contract more difficult, said John Tumazos of John Tumazos Very Independent Research. ATI's competitors in Alabama and Kentucky don't have a unionized workforce. Combined with pressure from Chinese imports and falling demand from oil and gas customers, ATI “can't afford to be generous anymore,” Tumazos said.

“It's very sad that there's a disagreement, but I think what Mr. Harshman doesn't want to do is sign a contract where he's not going to be able to make money or stay in business,” Tumazos said.

The Steelworkers staged a rally outside of ATI's headquarters Tuesday and said the company's situation would only get worse the longer it relies on temporary workers.

“If the company wants to again return to profitability, it must abandon this ill-advised lockout so its dedicated workers can return to their jobs and provide the needed expertise,” USW Vice President Tom Conway said.

ATI is about three-quarters of the way to its goal to cut $100 million in costs this year, officials said, and last week announced layoffs of salaried employees that would save $23 million annually starting next year.

Meanwhile, ATI has pegged its future to the commercial aerospace industry, where demand is growing for high-performance jet engine parts. Aerospace and defense is ATI's largest market, accounting for 39 percent of sales. Production is starting to ramp up for the next generation of jet engines and airframes and should drive the most profitable growth at ATI for the next five years. ATI expects to sell $1 billion in new parts for next generation aircraft between 2016 and 2020.

“They need to focus on execution in the aerospace side because that's where you can get margin,” said Josh Sullivan, an analyst at Sterne Agee in New York. “That's where the growth is. We've been waiting for this a long time and it's finally going to come into play in 2016.”

Meanwhile, ATI must deal with immediate challenges in its less-profitable businesses.

Anticipating a possible strike, ATI built stockpiles of its flat-rolled products in the first half of the year. But nickel prices have fallen 30 percent this year, which has hurt demand for those products and left ATI unable to recoup the costs of higher priced nickel.

In total, the lockout cost ATI roughly $50 million, mostly because it stockpiled product with higher-priced nickel, but also from lost productivity, Harshman said

Competition from lower-priced imports and domestic manufacturers has hit the company's flat rolled products segment hard. Sales in that business were $358 million, a 36 percent decline from a year ago.

“The global supply demand imbalance is still an issue. There is no doubt about that,” Harshman said. “That is where cost reduction, that's where efficiencies, a new collective bargaining agreement that is fair and more competitive, all that stuff comes into play because this is not really a temporary situation.”

Chris Fleisher is a staff writer for Trib Total Media. He can be reached at 412-320-7854 or cfleisher@tribweb.com.

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